Greenwich Financial Services, L.L.C.

Seven Greenwich Office Park599 West Putnam Ave.Greenwich, CT 06830

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Phone: (203) 599-4475

November 12, 2008Chairman Barney Frank and Ranking Member Spencer BachusHouse Financial Services Committee2129 Rayburn House Office BuildingDear Chairman Frank and Ranking Member Bachus:My name is William Frey and I am Principal and CEO of Greenwich Financial Services(GFS). My firm is a broker dealer that specializes in the structuring and distribution of Mortgage Backed Securities (MBS). I ask that this letter be made a part of the record of the hearing of the House Committee on Financial Services entitled, "Private SectorCooperation with Mortgage Modifications-Ensuring That Investors, Servicers andLenders Provide Real Help for Troubled Homeowners," on Wednesday, November 12,2008, at 10:00 a.m., in room 2128 of the Rayburn House Office Building.Because this Committee is interested in MBS, it is important to note that I have workedin the securitization industry since the industry’s infancy in 1981. My experienceencompasses virtually every aspect of securitization, from structuring and trading MBS toresearching and analyzing the securitization market. After nearly 15 years with majorfirms including Morgan Stanley, Smith Barney, and Bear Stearns, I founded GFS in1995. I received my B.S. from Cornell University in 1979 and my MBA from CarnegieMellon University in 1981. At my present firm, I have structured and sold billions of dollars of MBS securities with various types of collateral. I also acted as a financialadvisor to GNMA for more than 5 years, ending in 2004. In that capacity I wasresponsible for working with GNMA to select new product and program offerings as wellas assessing various types of market and credit risks. GFS was awarded this contractwith KPMG as its partner.As mentioned above, I own a broker dealer, GFS, which puts together MBS transactions.I have never put together a transaction using subprime collateral, and the last alternative-A (alt-A) transaction I structured was over five years ago. I chose to not structure dealsbacked by subprime and alt-A mortgages because I believed that they were of low qualityand I did not want my business to be associated with them.

2 I am submitting this statement for the record because on October 24

, six members of this Committee issued a letter in response to my comments in a

New York Times

articleregarding investors’ objections to the restructuring of mortgage loans (Tab 1). The letterrequested that I appear at this hearing. Early this week I was told that my testimony wasno longer needed but that a written statement could be submitted for the record. Mywritten statement consists of two parts. The first part seeks to clarify the record regardingwhat I believe are inaccurate characterizations of my work. The second part seeks to offerspecific recommendations on how to improve the American mortgage-backedsecuritization process in an effort to prevent similar crises in the future.For the record, I would like to clarify that I do not manage a hedge fund, as erroneouslyassumed in the letter to me dated October 24. I hasten to add that there is nothing wrongwith hedge funds, given that they invest the retirement and education funds of millions of average Americans. I am an individual investor and I manage a family fund. What thismeans is that I invest my own money in the U.S. and international capital markets, and Ido so judiciously and carefully after much research and analysis.All of the credit support securities I own were originated before 2004 and are not basedon subprime or alt-A collateral. The loans backing the securities I own have low loan-to-value ratios (meaning high levels of equity) and are performing well. The borrowerswere not tricked by teaser rates or encouraged to misrepresent their incomes. These aresecurities backed by mortgages secured by the homes of thousands of ordinary hardworking Americans who are making their payments as agreed, honoring their contractualcommitments.The reason I have no exposure to subprime is that I simply did not believe that the creditrisk of those securities and collateral was justified. Being involved in making loans topeople that cannot repay those loans has never made business sense to me. Contrary topopular opinion, there were some investors in this market that elected not to participate inthe unsound securities that triggered to the current economic crisis.Before proceeding, I would like to applaud Congress and this Committee for theirexpressed desire to provide relief to homeowners, many of whom are holding mortgagesthat are now ‘underwater.’ Eight months ago – before Fannie Mae and Freddie Macfailed – I proposed a solution to this critical issue with a similar goal. Indeed, in Marchof this year, I sent a letter to Secretary Paulson and Chairman Bernanke (Tab 2)suggesting a sensible, balanced and economically viable course of action. In that letter Iexplained an unfortunate fact of life: if a homeowner’s loan is included in a mortgagesecurity, he will have a more difficult time receiving the necessary relief than if his loanis owned directly by a bank. This is why FDIC Chairman Sheila Bair has been havingmore success modifying loans on Indy Mac’s balance sheet than modifying loans insecuritizations.

Proposed Solutions

Mortgage securitizations are managed by a contract called a “Pooling and ServicingAgreement” (PSA). A PSA is the basis for the securitization and binds investors, as theproviders of capital, with the issuers, as the consumers of capital. This is not the contractof the homeowner with either the bank or the firm that originated the loan. Instead, aPSA may cover thousands of loans and is the contract that specifies a Servicer’sobligations to bondholders and spells out a Servicer’s authority and ability to restructuremortgages. The contract that I was, and am still, seeking to ensure that Congress remainsfocused on is the PSA. Let me offer some recommendations of how the Hope forHomeowners (HHO) program may be improved, given the existence of these contracts.The HHO program allows Servicers to renegotiate loans to the lesser of 90% of marketvalue or 31% of the homeowner’s income as a loan payment in cases where suchrenegotiation is a better outcome than foreclosure. The question, though, is whodetermines what is the better outcome? Renegotiations are in the hands of the Servicers,who have financial incentives to avoid foreclosure, regardless of the outcome. Keepingsomeone in their home is cheaper than foreclosure for the Servicer, even if it createsgreater losses for the mortgage investor. Furthermore, there may be other financialbenefits to Servicers for each loan that is renegotiated. Finally, all participants in themortgage market are under political pressure to have homeowners stay in their houses.One need look no further than the letter I received from this Committee on October 24

to see evidence of the intensity of this political pressure (Tab 1).In the current form of the HHO program, there is effectively no oversight for objectivelydetermining the better outcome. Servicers that have much to gain from the renegotiationof mortgages have an incentive to pass unjustifiable losses onto investors. Supposedly,investors’ interests are protected by the Trustee of the mortgage securitization. However,in all PSAs with which I am familiar, the Trustee is indemnified for servicing errors.There is no party watching out for the bondholders’ interests and decisions are left in thehands of the Servicers, which often created these problems in the first place throughfraudulent loan originations.If the HHO program is seen as encouraging Servicers to restructure mortgages beyondthe limits in the PSA contracts, the program could create serious new liabilities for theServicers. These Servicers, which are largely banks looking for ways to increase feeincome and reduce expenses, have strong incentives to engage in mortgage restructuringat the expense of bondholders.In the context of our current housing crisis, it is essential to be clear about who are theinvestors in residential MBS. These investors are not only investment banks, collegeendowment funds, and sovereign wealth funds, but ordinary Americans in significantnumbers. Investors in private label MBS include pension funds, public retirementsystems, private sector retirement funds, and individual investors from all walks of life.To hold MBS does not automatically make one a “hedge fund” investor, but more likelyan everyday, investor investing in the fabric of American life.